Recourse vs. Non- Recourse Factoring – What’s the difference?
There are typically two types of programs offered by a factoring company – Recourse and Non-Recourse. At the end of the day, the difference comes down to which party, the factor or the Client, is responsible for repayment of the invoice if the account debtor doesn’t have the money to pay it within a pre-determined number of days.
Before you can decide which program is best for your company, you must understand the differences between the two and how that affects your exposure, fees, and availability of funds.
If you sell your invoice to a factoring company with recourse, you are responsible for repayment of that invoice if it is not paid within a certain number of days. In other words, you may be required to “buy back” that invoice. While you may think that isn’t the program for you, keep in mind that factoring with recourse generally gives you a program with more flexibility. a higher availability of funds, and a lower discount fee because you are taking on some of the risk. Recourse factoring may be your best bet if you rarely experience bad debt and are confident in your relationships with your customers.
Selling your invoices without recourse (non-recourse) means that the factor takes on the credit risk of the customers. So if your customer suddenly doesn’t have the means to pay your invoice, the factoring company can’t come back to you for repayment. This might be a good option to consider if you are looking for credit insurance on your customers. Don’t be fooled though….non-recourse factoring does not eliminate your responsibility to repay on invoices for reasons other than financial wherewithal. So you are still responsible to repay an invoice if there is a dispute of the work or product. While clearly there is a benefit to the factoring company carrying the credit risk, you will be charged a higher discount fee for this added value and your factor will likely be more conservative with credit limits.
The better program for your business is not for me to decide. There are pros and cons to both recourse and non-recourse factoring. Be sure to weigh both sides and choose the one that best suits the needs of your business. Regardless of the option you choose, factoring your invoices can expedite growth for your business, help meet payrolls, facilitate the payment of tax obligations, build inventory, and help you take on business you otherwise may have had to pass up.
What is important for the success of your business? What are you trying to accomplish by obtaining factoring? Make your list and start doing your homework. There are many factoring companies out there to choose from, with different appetites and expectations of their clients. The choice between recourse and non-recourse factoring is an important one. I encourage you to take your time, ask lots of questions and don’t forget to ask about contract commitments, monthly minimum requirements, and added services such as credit analysis and collections.
Too much for one article……I’ll have to save that for next time.
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